Traders start pricing in the opportunity for a rate cut from the European Central Bank late next year

Traders start pricing in the opportunity for a rate cut from the European Central Bank late next year

By Yoruk Bahceli

(Reuters) – Eurozone money markets are pricing in an opportunity for a European Central Bank rate cut late next year, as traders are betting the bank could end up over-tightening monetary policy by implementing a series of big rate increases. .

Last week, the European Central Bank raised its deposit rate by an unprecedented 75 basis points to 0.75% to tighten its “front-loading” policy and stem spiraling inflation. The bank indicated that interest rate increases could continue into early 2023 even as the bloc prepares for a recession.

Since that meeting, traders have ramped up their bets on bigger moves. Money markets are now pricing in about 70 basis points of gains in October and December. They see rates peaking at around 2.7% in mid-2023, according to ICAP (LON:) data provided by Refinitiv.

However, due to this sharper outlook, traders are also beginning to bet that the ECB will then start cutting interest rates – money markets are seeing rates at around 2.6% by February 2024.

Ahead of last week’s European Central Bank meeting, an additional 90 basis points of hikes were priced in by the end of the year and rates were seen peaking at around 2.2% and then stabilizing.

Graphics: Traders begin betting on an ECB rate cut: https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrxnqopm/uzX46-traders-start-betting-on-ecb-rate-cut-after-mid- 23-peak. beng

β€œWith the ECB in front-loading mode and taking a paper from the Fed’s ledger, I expect more of a reversal,” said Antoine Buffet, chief interest rate strategist at ING, referring to the rate cut at which it is priced.

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Moves in the eurozone financial markets echo what was happening in the United States.

There, the Fed also raised interest rates, delivering 200 basis points of increases since May.

Concerns that aggressive rate hikes will push the US economy into recession, led traders to price around 50 basis points of Fed rate cuts next year after peaking above 4% in March.

For the eurozone, a Reuters poll expected the European Central Bank’s deposit rate to peak at 1.50% and stabilize there, but investment banks Nomura and Pova, and German insurance company Allianz (ETR:) are among those who have already expected cuts. At interest rates next year or in 2024.

The shift since last week suggests that traders are seeking more than a 40% chance of a 25 basis point cut by February 2024. But Pete Christiansen, chief analyst at Danske Bank, sees a one-time rate cut unlikely, instead saying it reflects the market Pricing a small probability of a multiple rate cut of 25 basis points.

“I think the hurdle is very high and also because inflation is going to record above 2% until the spring of 2024 in Europe, so politically, could (ECB President Christine) Lagarde cut rates with inflation above 4%? I’m not sure.” added.

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